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What to Watch When MercadoLibre Reports Earnings on Wednesday

Can the leader in Latin American e-commerce continue to thrive with Amazon in the house?

MercadoLibre(NASDAQ:MELI) has given investors much to be thankful for. Over the years, the Latin America e-commerce company has produced significant growth, even in the face of political and economic uncertainty in some markets and spiraling inflation in others. The company grew revenue by more than 65% last year, and producing those impressive results under trying circumstances caused the stock price to double in 2017.

The company has some challenges in the near term, however. With MercadoLibre scheduled to report the results of its first quarter on Wednesday, May 9, after the market close, let's take a look at some of the things investors will be looking for.

MercadoLibre is preparing to compete with Amazon on its home turf. Image source: MercadoLibre.

Trouble in paradise?

To recap last quarter's results, MercadoLibre reported revenue of $437 million, an increase of 70% year over year and surpassing analysts' consensus estimates for $404.7 million. The company posted a surprise net loss of $67.7 million, as it decided to deconsolidate the results of its Venezuelan operations, as it "no longer has accounting control" of the segment, due to rapidly spiraling hyperinflation. Adjusting for that one-time event produced net income of $8.8 million and earnings per share of $0.20, an 83% decline from the prior-year quarter.

Recent reports indicate that Amazon.com(NASDAQ:AMZN) is coming full on into Brazil. MercadoLibre has ramped up free or low-cost shipping in several of its largest markets in anticipation of Amazon's encroachment, which has weighed heavily on the company's profit margin and bottom-line results. MercadoLibre executives have stated that they believe the short-term margin pressure will result in increased long-term market-share gains.

For the current quarter, analysts' consensus estimates are calling for revenue of $413.96 million, which would mark year-over-year growth of 51%. Analysts are also expecting earnings per share of $0.44, a decline of 60% compared to the prior-year quarter, as the company expands it shipping initiatives.

Growth, growth, and more growth

While MercadoLibre's financial results can be hit or miss based on exchange rates, there are several metrics that investors can watch that are a good proxy for growth, and strip out foreign currency effects.

User growth is the foundation upon which all other things rest for MercadoLibre. The company has put up year-over-year user growth of 20%, on average, for 25 successive quarters, most recently above 21%. Any noticeable decline in trajectory of user growth would be cause for concern.

Items sold is an effective proxy for demand -- and it's another area where the company has been consistently strong. While the metric has increased by 40%, on average, in six of the past eight quarters, that growth accelerated above 50% in the back half of last year. MercadoLibre's low-cost or free shipping across a growing number of products and markets caused adoption to spike. Any significant falloff in items sold could signal issues.

Payment transactions has become the crown jewel of MercadoLibre's performance in recent years. In a region with low use of checking accounts and credit cards, the company's payment solution -- MercadoPago -- has provided the company with significant growth. The service, which was modeled after PayPal, was so successful that a growing number of off-platform merchants, in both brick-and-mortar and online stores, have adopted MercadoPago as a payment option. That has resulted in payment transactions that have grown in excess of 60% year over year in each of the last 12 quarters, most recently above 70%. Any notable decrease in that growth rate would warrant further investigation.

The bottom line

MercadoLibre has produced stellar growth on its home turf and has taken a page from Amazon's playbook by offering free shipping for many of its customers. I think this positions the company for continued growth. Investors should look for updates from the company on continued expansion of those efforts, as well as increased adoption of the platform by customers and merchants.

Author

Daniel W. Vena, CPA, CGMA is long-term investor searching for intangibles that provide explosive growth opportunities in his investments. He served on active duty with the US Army and has a Bachelors degree in accounting.
Follow @dannyvena